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Discount Rate Reduction - Good News for Claimants

Date: 3 March 2017

You may have seen on the news recently that the Lord Chancellor has made a change to the way that some awards for personal injury and clinical negligence are to be calculated. The change has come about because the LC has reduced the discount rate which is applied to certain aspects of claims for future loss such as loss of earnings and the costs of therapies to -0.75% from 20 March 2017.

If a Claimant in a personal injury or clinical negligence claim has a continuing loss such as a loss of earnings and say, for example, that the loss is calculated to be £10,000.00 per year, the law will not award that Claimant £10,000.00 for every year they are likely to have the loss, such as to the age of retirement in the case of loss of earnings or for the rest of their life in the case of some therapies. Instead the law takes account of the fact that the Claimant will receive the award in one lump sum and, in the most part, earlier than he or she would have earned it or needed the therapy (in the case of the later years). Because the money is coming in a lump sum, the law says that the Claimant can invest it and will make an amount of interest and, as a result, they will be over-compensated and receive more than the actual loss. As a result, the law devised a system known as “multipliers” by which it reduces the lump sum payable, to take account of the likely return on the investment.

The multipliers are set by actuaries and have regard to the return that a Claimant is likely to make if he or she invests the lump sum in a safe way. This expected return gives rise to what is known as the discount rate.

The discount rate is currently 2.5% and has been at this level since 2001. The discount rate assumes that the Claimant will be able to achieve a rate of 2.5% on safe investment of his or her damages. The discount rate was not reduced as a result of the financial crisis nor the fact that interest rates have been much lower than 2.5% for some time.

The Lord Chancellor’s decision came as a surprise to almost all lawyers working in this field. A downward reduction had been hoped for but such a dramatic reduction was totally unexpected.

As a result, because it is now accepted that the Claimant will get less of a return on his or her lump sum, the multiplier upon which his or her future loss is calculated will be increased and the damages will go up.

However please note that this will only apply to items of continuing future loss which are to be paid as part of a lump sum and not one off future losses, past loss, general damages (the money Claimants are awarded for their actual injuries) or periodical payments.

Periodical payments (yearly amounts paid for care and case management and sometimes other aspects of damages) will not be affected because they are paid every year for life and are not tied to a multiplier.

This is a very welcome and long awaited change in favour of Claimants. It will undoubtedly cause difficulties for Defendant insurers and the NHSLA who pay out the damages in claims against hospitals but for many years Claimants have been undercompensated as a result of the discount rate being left at 2.5% for too long.

 

If you would like to discuss how the reduction in the discount rate might affect your claim please telephone on 01253 356051 and speak to Sarah Barclay or Trudy Buck

 

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